Improving Spanish standards

Carlos Franco Duque, Rafael Núñez-Lagos.

2015 Ethical Boardroom, Spring

Spanish companies are primarily regulated by the Companies Law, approved by Royal Legislative Decree 1/2010, of 2 July (the Companies Law 2010), which sets out the rules for all limited liability companies, including a section with specific rules for listed companies. A new law entered into force in December 2014 amending the Spanish Companies Act with the goal of improving corporate governance. The new legislation is one of the most significant reforms to company law in recent years and, in general, represents a significantly positive modernization of Spain’s corporate law, both for public and privately-held companies. The amendment implements the proposal issued by an ad hoc expert committee appointed by the government in 2013 to analyze international corporate governance best practices and propose measures to update and improve Spain’s framework at that time.

The changes can be grouped in two broad categories: (i) those affecting the shareholders’ general meeting and rights of shareholders, having their as their principal objectives the reinforcement of the role of shareholders, opening channels to encourage shareholder participation in the control of the management and protecting the rights of minority shareholders; and (ii) those relating to boards of directors and the role of directors, focusing on three key areas: fiduciary duties, remuneration and specific rules on the organisation of the management of listed companies.

This update focuses on the second group, which represents the more innovative portion of the reforms introduced. The underlying purpose of those measures is modernising the legal regime, either by “importing” laws inspired by comparative experiences, or by codifying into law elements that were previously non-binding recommendations, based on the principle of “comply or explain”, contained in the “Consolidated Code of Good Governance in Listed Companies” (Código Unificado de Buen Gobierno de las Sociedades Cotizadas, the “CUBG”). In this way, Spanish legislators qualify the soft law approach typical to the regulation of listed companies. Empirical evidence suggests that, on many occasions, the quality of corporate governance can be improved, not primarily by a lack of useful guidelines and recommendations, but more as a result of companies’ tendency to only formally or partially complying with those[1].


One of the most notable aspects of the reform is the new, integral regulation of directors’ fiduciary duties. The legislation has defined and systematised the essential legal concepts – the duty to act diligently, the duty of loyalty and its various manifestations – and has designed a dual-pronged framework under which the review of conduct and the consequences of any breaches of those two duties are treated differently. The new regime is imbued with the philosophy summarised by the adage: “indulgence with negligence, severity with disloyalty.”

The reasons behind a more permissive treatment of negligence are well known and relate to the: (i) greater alignment of directors’ incentives with the interests of shareholders (the breach of the duty of diligence provides no potential benefit to the breaching party), which allows one to presume that negligent conduct only represents a moderate risk to the company; (ii) existence of disciplinary mechanisms or alternative enforcement through market forces (greater visibility, reputational risk, etc.), reducing the necessity of reinforcing the protection legally; and (iii) heightened uncertainty associated ex ante with judicial treatment of negligence (directors cannot foresee the legal consequences of their actions), from which derive notable costs to the company in the form of escalating remuneration, difficulties in recruiting qualified directors, excessive caution in the decision-making process, conservative commercial strategies, etc.

The more tolerant framework is first reflected in the law’s express recognition that the level of diligence demanded from directors varies according to the nature of the role and in the duties carried. For example, greater focus is invariably placed on the chief executive, in whom the effective direction of the company rests, than on an external director (consejero externo). This approach essentially qualifies or modulates the traditional principle, which survives the reform, establishing the rebuttable presumption that all members of the board of directors are jointly liable unless they can demonstrate they had no responsibility in the event or harmful decision.

Secondly, it reinforces the “business judgement” rule, inspired by US practice and that of other common law jurisdictions. Although alien to Spanish legal tradition, the application of the rule had already been accepted by legal scholars and applied in various judicial decisions prior to the reform. The rule’s objective is to preserve the discretion of business decisions, prohibiting the judge from reviewing and correcting those decisions from a perspective of compliance with the duty of diligence as long as various requirements are met: the directors acted in good faith, with sufficient information, pursuant to an adequate decision-making process in the absence of any conflict of interest. The protection is lifted if a conflict of interest exists, and the judge is authorised to review the decision when any director or related person has a personal interest in the decision. That result remains true even if, precisely because of such conflict, the person has not participated in making that decision. This final requirement, which diverges from the approach in other jurisdictions recognising the business judgement rule, is highly relevant. The result, in practice, is that all related-party transactions falling within the remit of the board of directors fall outside the remit of business discretion and are subject to judicial scrutiny.

As a counterpoint, the reform reinforces the duty of loyalty through a number of mechanisms[2]. Firstly, the law orders and details the basic obligations derived from the overall duty of loyalty (duty of secrecy, of abstention, of the independence of criteria, of the avoidance of conflicts of interest), expanding the pre-existing catalogue drawing on doctrine and comparative experience. In particular, it develops the issues relating to conflicts of interest by expressly establishing a list of prohibited acts and conduct which include the following: (i) carrying out transactions related to the company; (ii) exploiting the role of director for a private end; (iii) making use of corporate assets; (iv) competing with the company; and (v) obtaining advantages or remuneration associated with the fulfilment of their role from third parties (i.e., not the company or its group). These prohibitions are treated as “relative”, in the sense that the company may waive them on a case-by-case basis. Waiver falls within the remit of the board of directors, except for more serious cases, in which the general shareholders meeting has the authority to act – when its purpose involves authorising third party remuneration or any related party transaction with a quantum is exceeding 10% of the value of the company’s assets, or waiving the prohibition on competition (in which case it is required that there be no chance of damage to the company, or that the damage expected is compensated by the foreseen benefits).

Secondly, the regulation extends, or in some cases defines more precisely, those falling under the scope of the prohibition to include: (i) natural persons who represent directors that are legal persons, and (ii) de facto directors (not legally appointed, but fulfilling that role in practice). The second case is highly relevant as the law has extended the concept of “de facto director” to individuals who fall within the “highest governance of the company” (which, without doubt, includes the general manager (director general) when the board of directors has not permanently delegated its functions to a delegated body or executive committee). The result is that directors’ duty of loyalty is extensive to individuals who do not hold a position as directors (and the same regarding the consequences of breach).

Lastly[3], the reform increases flexibility and facilitates the enforcement of directors’ responsibility by the company’s shareholders through a “corporate liability action” (acción social de responsabildiad) –i.e., the channel through which the company may enforce the duties of directors for damages caused to it– . Firstly, the ownership interest needed for the shareholders to bring such action is reduced (from 5 to 3%) for all companies and in all instances. And secondly, when the damage derives from a breach in the duty of loyalty, the shareholders have standing to bring the action directly without having to wait for a resolution at the shareholders’ meeting[4].  Although we believe the reform on this point is an improvement, it may have been optimal to decrease the threshold to 0.1% (1% in listed companies), which would be consistent with the threshold required for challenges of corporate resolutions by shareholders.


Directors’ remuneration is undoubtedly a trending topic in corporate governance and has been the subject of much debate and legal change in recent years. The preoccupation with this matter, generally present in comparable countries and enshrined by the European Union, the G-20 and the OECD in a number of documents, extends to aspects such as the transparency of remuneration, tailoring it to market practices, its qualitative adequacy –principally from the point of view of incentives for the assumption of risk – and the procedures for approving such remuneration. In recent years we have witnessed a proliferation of rules, recommendation and guidelines on directors’ remuneration, addressing these issues both in the EU and in Spain, particularly in the arena of financial institutions.

The reform represents an additional step in this process, complementing the existing framework with a series of imperative rules that: reinforce the shareholders’ ability to exercise control over the remuneration of directors; provide them more influence in ensuring that remuneration systems are appropriate in view of the market in which they operate and the company’s economic situation at any time; and establish a procedure for determining remuneration that is orientated towards preventing conflicts of interest and increasing transparency. The most notable additions are the following:

·         Directions or general principles

The reform makes explicit various substantive criteria applicable to the remuneration of directors, both in the configuration of remuneration categories in the company by-laws as well as their quantification by the shareholders or the board, as applicable. In particular, it establishes that “the remuneration system established should be orientated toward encouraging economic feasibility and the company’s long-term sustainability and incorporate the necessary actions to avoid the assumption of excessive risk and the reward of unfavourable results.” In all cases, the retribution must “retain a reasonable proportion to the importance of the company, the company’s economic situation at any moment and market standards of comparable companies”. These are not recommendations or programme statements, but rather binding laws. Based on these rules, there is an expectation of increased litigation related to remuneration abuses.

·         Overcoming the “linking principle”

Pursuant to the reform, it is likely that the consequences regarding remuneration, deriving from the historical jurisprudential concept denominated as “linking principle” (doctrina del vinculo) will be overcome. This principle was based on the notion that: (i) there is no difference between the two possible ambits of directors’ actions, that is, between the functions of supervision and deliberation inherent in the role of any director, on the one hand, and executive functions on the other hand; (ii) the link between a director and the company is unique; and (iii) any other commercial or employment relationship alleged between the director and the company which has as its purpose actions that may be assimilated to those that are inherent in the executive function is captured by the statutory duty of the director. In connection with remuneration, the principle’s consequence has been that, although it is possible to specifically remunerate the implementation of executive functions, it was thought that, in doing so, a director was being remunerated in his or her capacity as such and, therefore, the remuneration should be subject to the legal framework on the remuneration of directors (including the necessity to specify remunerative items in the by-laws, and the need for shareholder approval).

Following the reform, the law establishes an orderly allocation of decision-making authority. For companies with a collegiate management system (i.e., a board of directors), the remuneration mechanisms of non-executive functions must be specified in the company’s by-laws, the shareholders will approve the global annual maximum assigned to the board, and the board will distribute that maximum amount amongst its members in consideration of the functions and responsibilities of each. As regards executive functions, the law now expressly states that the power to decide remuneration lies solely with the board.

The aspects described above are applicable to all types of companies. Listed companies are also subject to a special rule that limits the board’s discretionary scope: the remuneration of the board for the implementation of both executive and non-executive functions must conform to the remuneration policy approved by the shareholders[5].

·         Requirement for the shareholders’ approval of remuneration policy

Another novelty of the reform is that, in listed companies, the shareholders must, as a binding requirement, approve directors’ remuneration policy at least every three years. The directors may not receive any form of remuneration from the company if it is not in accordance with the policy, unless it has been specifically approved by the shareholders themselves.

Prior to the reform, the law only required an annual advisory vote by the shareholders on a directors’ remuneration report, in line with the rules applicable in other jurisdictions, particularly the US and UK. Following the reform, this requirement is maintained, but supplemented by the requirement of a binding shareholder vote on the directors’ remuneration policy. Furthermore, if, after the policy is approved, the shareholders reject the remuneration report (for any reason and any applicable time), the policy in force is deemed to be revoked for the following financial years, and must be resubmitted to a vote by shareholders at a shareholders’ extraordinary meeting to be held before the end of the current financial year.

·         Execution of a contract with executive directors

The executive directors must execute a written contract with the company that details all the mechanisms through which executive functions are remunerated.  The contract must be approved by the board with a favourable vote of 2/3 of its members, without the participation of the affected board member, and must be consistent with the remuneration policy approved by the shareholders.


Finally, specific changes to the organisation and operation of boards of directors stemming from special rules solely applicable to listed companies should be highlighted.

·                Exclusive powers of the board of directors

The catalogue of powers reserved to the board (and therefore not subject to delegation) is extended for all types of corporate entities. For listed companies, the catalogue is even more expansive and not only incorporates the list included in the existing recommendations of the CUBG but also additional powers, such as setting the company’s tax strategy –incidentally, the latter is a very serious matter for which the board is now held responsible.

·                Consultative committees

Listed companies must have a nominations and remuneration committee (or, where appropriate, two separate committees). To date, the existence of the nominations committee was merely a recommendation under the CUBG. Conversely, the audit committee was already mandatory for all companies issuing securities that are traded on official secondary markets, listed companies being among them.

·                Separation of the functions of the CEO and Chairman

The new law does not make any determination on whether the positions of CEO and chairman should be split. Nevertheless, if combined, it now expressly requires the appointment of a lead independent director. The new approach is consistent with the former recommendations of the CUBG and mirrors standard practice in other jurisdictions.


The reform’s outcome is, on whole, positive. It is a resolute and, in general, technically-sound endeavour towards modernisation. It has enriched our legal acquis with sensible, long-tested criteria originating from some of the most recognized jurisdictions (e.g. the business judgment rule); it has made law a number of recommendations already rooted in domestic and international practice; and it has taken robust steps towards fomenting transparency and accountability, especially in connection with directors’ remuneration –indeed, more determined than most countries of our legal environment. Succinctly, it has ultimately improved the quality of the Spanish corporate governance system.

If criticism must be made on the technical side, it is the excessively wide scope of some rules which, although designed to apply to all types of companies, would have likely been more appropriately restricted to the specific sphere of listed or unlisted companies. For instance, the law now reserves to the shareholders’ discretion all decisions on acquisitions and disposals when the transaction amount exceeds 25% of the company’s asset value. This is yet another rule directly inspired by UK law, where, in contrast, it only applies to listed companies. That, in our opinion, is its natural field of action, and not closed, smaller companies for which it will possibly create undesired effects. Another example, though in the opposite direction, is the rule whereby shareholders can issue binding instructions to the management body on matters that fall within the scope of authority of the latter. That rule is now expressly stated to apply to all types of companies, despite clearly not being suitable for listed companies, which are characterised, among other factors, by a higher degree of specialisation among the governing bodies.

Having recognised what has been done, we cannot fail to mention what has not been done and remains missing. In particular, the notion of group interest has not been addressed, which interaction with the company’s interest underlies some of the most delicate issues of corporate governance and yet lacks appropriate solutions in Spanish law. The reform has honed the regulation of the duty of loyalty but, in doing so, has focused solely on the company’s interest, potentially missing an opportunity to bring group interest into the equation. In fairness, this is nevertheless only one aspect of a wider and more complex area of law, group law, which will need, at some stage, to be the subject of an integral approach by the Spanish legislature. We look forward to future developments.

Finally, the ongoing update of the CUBG, which was entrusted to the securities market regulator (the Comisión Nacional del Mercado de Valores) with the assistance of the expert committee, is also of note. At the time of writing these lines, the work has already been completed and the new code is pending imminent publication. The update is closely linked to the recent legal reform and its purpose was twofold: reorganising the set of recommendations addressed to listed companies taking into consideration that a fair amount of those that were contained in the CUBG have been codified as statutory provisions; and modernising its content by updating it to reflect the most recent international trends[6] and by encompassing new areas of corporate governance[7].


[1] The European Commission was highly critical in the Green Paper on the EU corporate governance framework (Brussels 04.05.2011, COM (2011) 164 final), leaving the door open to more extensive regulation on corporate governance through mandatory rules.

[2] The reasons justifying greater severity in this area are precisely the reverse of those that suggest a policy of indulgence in the treatment of negligence, namely: (i) the existence of incentives for the production of personal benefits, increasing the probability of disloyal conduct; (ii) lower visibility regarding self-dealing practices and inadequacy of disciplinary mechanisms created by market forces and, therefore, the need for a legal remedy; and (iii) greater certainty ex ante regarding court rulings on disloyalty, implying that the costs associated with risks of error and overcompliance are scarce.

[3] In addition to the mechanisms described, transparency obligations regarding related party transactions, which were already included in the regulations prior to the reform, also constitute a valuable tool in facilitating the enforcement of disloyal conduct.

[4] Previously, shareholders could only exercise this power subsidiarily in the event the company did not do so following a shareholders’ meeting to decide upon the matter.

[5] The policy must set out, for each year, at least: (i) the aggregate compensation awarded to the board as a whole for the performance of non-executive duties; and (ii) with respect to executive directors, the amount of fixed remuneration, the parameters for variable remuneration and the main terms and conditions of their executive contracts, including duration, severance payments, exclusivity and post-employment obligations, including non-compete and paid leave arrangements.

[6] For instance, in line with proxy advisors’ voting policies in recent years, the new code will likely recommend that the delegation of authority to the board to issue shares or convertible securities with the ability to withdraw shareholders’ pre-emption rights should not exceed 20% of the outstanding share capital at the time of the delegation.

[7] In particular, corporate social responsibility will, in all likelihood, be the subject of new recommendations.

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